A bargaining model with uncertainty and varying outside opportunities

The main purpose of this paper is to propose an alternative way of explaining – within the bargaining theory framework – the stylised fact of flat wages and employment bearing all the adjustment to shocks. Standard models predict this behaviour under the assumptions of a constant elasticity production function and a reservation wage independent of shocks. Once the latter is removed, however, the result holds no more. The proposed two-stage model, in which the second stage involves negotiations over employment after the state of nature is revealed, would allow to recover it as a consequence of the uncertainty agents face when bargaining over wages in the first stage. The model nests other formulations and allows for Pareto efficient and inefficient outcomes, depending on union power, agents' beliefs and the observed state of nature.